Small biotech offers investors an easy way to cash out

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Like a lot of biotech companies, Tempe, AZ-based Capstone (CAPS) Therapeutics has high hopes for its mid-stage program. If its Phase II trial of AZX100 for scar reduction produces promising proof-of-concept data, its executive chairman says the drug has blockbuster market potential.

But unlike virtually every other drug developer in the business, Capstone is also offering its investors a clean break if the program turns out to be a bust. Shareholders are getting put options that will allow them to extract their portion of the company's remaining cash--adjusted for liquidation value--in mid-2011. If the data is good, they'll want to hold on to their shares, which will be worth considerably more than they are today. If it's bad, well, at least they won't have to stick around to see how some desperate merger deal or 11th hour Hail Mary business plan turns out. Each share could still be worth 35 cents to 40 cents under the worst-case scenario offered by the developer.

"Either we have created market cap value by mid-2011, or our stockholders can opt for remaining available cash," Holliman said a few weeks ago, when he floated the plan for investors. "We believe this program is novel within the biotech community, and we feel it is the right thing to do for our investors."

Capstone has gone through plenty of changes since the operation first started business. It changed its name from OrthoLogic to Capstone in 2008, two years after it acquired the AZX100 assets from AzERx. And the old company sold its bone device business back in 2003.

"It's never pleasant to think about mortality, but a "living will" at least provides a graceful exit when a company's time has passed," concludes the New York Times, which reviewed the put options in today's issue. In the make-or-break world of biotechnology, it could also offer a new investment model for the future.

- here's the press release explaining the plan
- here's the story from the New York Times

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